Businesses in Russia will be hit hard by the Covid-2019 pandemic. However, it might do more damage to ordinary Russians -- about 8.6 mln of residents are likely to lose their jobs. For those who are employed in the so-called “grey economy,” the situation is likely to be even worse.
They will have little recourse even to those scanty support measures that are available to others.
According to the estimates of the Chamber of Commerce and Industry (CCI) of the Russian Federation, currently, 3 mln legal entities and self-employed entrepreneurs in the country are at risk of closure due to an outbreak of the coronavirus disease. This might cause job cuts for 8.6 mln workers, says a RF CCI survey held in the Russian regions on March 16-17.
RIA Novosti quoted the report saying the products or services of one small business in three have almost no demand at present. Under these conditions, businesses will be able to survive about a quarter the year. In the future, large-scale winding-down is inevitable. Chances are the harm will be irreparable for every other entrepreneur -- half of the respondents said that they would not be able to recommence operations after the crisis.
“At present, the closure of international borders, a rapid decline in demand, a surge of exchange rates, restrictions of activities in the sector of tourism, air transportation, hotel and restaurant business, exhibition activities, as well as self-isolation, the forced idling imposed on workers, high risks for the fulfillment of loan obligations and many other factors are most seriously affecting the companies’ operations,” said the Chamber of Commerce and Industry of Russia.
Proceeding from this survey, the CCI has sent a package of proposals to support small and medium businesses to the government. They include the full tax holidays with deferred payment of basic taxes and the maximum possible reduction of the tax burden on business. In addition, “a temporary moratorium on checking and blocking accounts, reducing VAT and postponing the introduction of mandatory labeling” is required, says Elena Dybova, Vice President of the RF CCI. The Cabinet of Ministers has already approved some of these proposals, while President Putin made public some other ways of supporting businesses and people.
According to the Unified Register of Small and Medium-Sized Businesses, there are 5,960,356 small and medium-sized enterprises in Russia. At the same time, the average staff on the payroll is 15,276,648 nationwide. According to Ivan Kapustyansky, a leading analyst at Forex Optimum, this means roughly 21.5% of economically active population. He also says there are 2,538,368 small and medium-sized entities with an average number of 6,791,186 employees in the Central and Northwestern Federal Districts.
Taking into account the above-mentioned statistics, Kapustyansky believes the CCI estimates are out of proportion. Even under a strict quarantine, it is unlikely that half of the enterprises in Moscow and St. Petersburg will be liquidated. A lockdown seems possible only in these two cities so far. He admits that losses are highly likely. However, they will affect separate sectors only. First of all, they will wield impact on entertainment and tourism. That is, the cafes, restaurants, event agencies, and retailers which do not do business online may face bankruptcy. Chances are Russia’s other regions will not face severe problems. At present, several segments are a bit low but the whole situation has not changed drastically.
However, even the closure of a part of small and medium enterprises is going to lead to certain problems, adds Kapustyansky. Unemployment in Russia will definitely soar. Add to it that the government's social expenditures to support unemployed residents will grow while the amount of taxes collected will decrease. In fact, it is a direct loss for the state.
Nikita Ryabinin, head of Luxembourg’s office of the KRK Group consulting group, told wek.ru that under a negative scenario, if the quarantine measures are extended for a long time, the above-mentioned forecasts are feasible. It is important that the authorities will support businesses that suffer the most from the pandemic. In particular, it concerns the segments of small and medium-sized businesses which quickly lose their solvency in the conditions of crisis.
In fact, flanking measures are already being discussed and introduced: tax benefits, deferred rent and other payments, easy loan terms, suspended inspections and security holds. During the crisis, this will reduce the administrative and financial burden on business.
Nevertheless, Ryabinin believes that bankruptcies are highly possible, mostly among small-to-medium enterprises. However, at present, it is impossible to make any forecasts for the coming losses. As for the Russian economy, it is quite probable that it will go into recession, as the GDP will decline from 0.5 to 0.8% and inflation will rise.
The International Labor Organization has warned that as a result of the quarantine, which is affecting more than 2.5 bln people around the world, a total of 25 mln people may lose their jobs. Artyom Deyev,еру head of analysis department of AMarkets, has more discouraging statistics. Total freezing of operations in several industries will lead to the fact that the economy will be recovered for a long time. Meanwhile, the demand will not start growing at the same pace. This means that companies will start to minimize their costs and downsize their workforce.
In our country, Deyev says, air transportation and tourism became the primarily affected sectors. Layoffs have already begun in the former sector, and the latter one has actually ceased to exist. A total of up to 80% of employees in tour companies may be fired. According to various estimates, about 200,000 of people have already lost their jobs in this segment. Due to the falling traffic in shopping centers (a 50 percent drop) and large stores, redundancies have started. As an alternative, salespeople are downgraded to work in courier delivery services if any.
In Moscow retailers have already fired about 10,000 people. Restaurants and cafes have also started doing some downsizing. Some companies are liquidating completely. Personnel recruitment in retailers decreased by 15-30%. As a result, they were forced to reduce costs for employees and recruitment agencies. The closure of cinemas, fitness centers, swimming pools, museums and theatres will also inevitably result in job cuts. Deyev is confident that in chain order, this process will affect all industries and areas of life.
In Deyev’s estimates, unemployment in Russia may rise to 10-to-15% over the next three months. At the same time, there will be a significant increase in hidden unemployment when employees are transferred to part-time work or lower salaries. Only a substantial growth in unemployment benefits is of a great help in this situation. At present, the lower level of benefits is 1,500 rubles ($19.3,) and the upper one is 8,000 rubles ($102.92.)
Alexey Krichevsky, an expert at the Academy of Financial and Investment Management, says that it is important to bear in mind that the current status of labor market differs drastically from the one at the beginning of the year. There is no sense in comparing them because in a month or two, a huge number of new CVs will flood the employment market.
At the same time, the problem with employment is likely to be somewhat similar to the crisis of 2008. At that time, even the best experts in their sectors from sales to startup directors struggled to get a job with 70% maximum of their previous and hopes for a 20% increase. There have already been waves of job cuts in tourism sector. A severe crisis is highly likely to hit the industry. As defaults on loans are expected to exceed 4 trln rubles ($51,458,400,000,) owners of shopping malls are seeking help from the authorities.
During the spring, Krichevsky told wek.ru, we will witness the collapse of food and drink venues and several millions of their workers, as well sales representatives and managers queue up for new jobs. Already today, the turnover of restaurants has decreased by 30-to-90%. Hotel room occupancy vs. March has fallen 30%, and these figures will continue their steep climb the end of the month. Many small tailoring shops and accessories stores will be forced to go online and survive from one order to another. As a result, the incomes of hundreds of thousands of people will plummet. In fact, the entire small and medium-sized business sector will be at risk apart from the groceries, food delivery sector and other industries that provide for people’s basic necessities.
Essentially, it makes sense, believes Krichevsky. When quarantine is introduced, demand will immediately drop. This affects the services that people used before: from catering and cinema to hairdressers, veterinarians, nightclubs, leisure time activities and tourism. The basic needs are becoming top priorities. The problem is that not so many people work in this segment, and there will not be enough jobs to meet at least part of the demand for the number of people who will in themselves in the labor market.
Krichevsky believes that by autumn there will be a huge number of individuals going bankrupt, legal entities with defaults on obligations and a sharp decline in business activities in Russia. The economy will unlikely reach last year’s levels of activity earlier than 2022, as the authorities, judging by their statements and actions, are not going to support business at all. In addition, the measures they take to help the entrepreneurs pale in comparison to those of countries of Europe and, moreover, the U.S.
Another thing is that since Russia's existence as a state separated from the CIS and the USSR, there have never been precedents of rescuing businesses in hard times. Accordingly, they should rely only on themselves. The tendency towards digitalization of the world economy is gaining popularity. There is the evidence that many people will have to adapt to the new reality.
Meanwhile, the so-called “grey economy” should be taken into account. In Russia, it is huge. People employed in this sector are not officially unemployed. However, the declining demand for their services will leave them without earnings. The indicator of the off-the-books economy in Russia is one of the biggest in the world, reaching 40% of the GDP. Although the figures shown by the Russian Federal State Statistics Service (Rosstat) are promising. However, Rosstat is widely known for its optimistic data. According to them, in 2018, the share of residents over 15 working in the informal sector was 20.1%, which is 14.6 mln people. According to the estimates of the Federal Tax Service, at the beginning of 2020, at least from 15 to 30 mln people worked in the “grey” economy sector in Russia, that is, one Russian in five. At present, all of them are left without any support from the state because in case of loss of their incomes they will not be able to legally confirm their financial status to the banks.